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Greater use of renewable energy is being aggressively promoted to combat climate change by the Chinese government and by other governments. Agricultural straw is the kind of renewable energy source that would become a pollution source if it is not well utilized. We select the Shiliquan straw-based electricity generation project in Shandong Province, China as a case and assess environmental externalities of straw utilization in power plants by using life-cycle analysis. Results show that straw-based electricity generation has far fewer greenhouse gas (GHG) emissions than that of coal-based electricity generation. Improvement in the energy efficiency of equipment used for straw’s pretreatment would lead to a decrease of GHG emissions and energy consumption in the life-cycle of straw-based electricity generation. In case 400 million tonnes of wasted straw in China could be used as a substitute for 200 million tonnes of coal, annually the straw 291 Terrawatt hours (TWh) of electricity could be generated, resulting in an annual total CO2 emissions savings of 193 million tonnes. Straw-based electricity generation could be a high-potential alternative for electricity generation as well as an incentive for utilizing wheat straw instead of burning it in the field.